Financial Statement differentiation paper

Financial Statements Differentiation Paper
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Financial Statements Differentiation Paper
Financial statements are formal records that show the financial activities of an individual, business, or institutions. Financial statements are usually presented in figures showing various expenditures, earnings, investment, and equity growth patterns of a business organization. The statements are analyzed by the relevant authorities and the information used to make major decisions. The most commonly used financial statements include balance sheet, income statement, cash flow statement, and statement of owner’s equity.
Balance Sheet
A balance sheet is a statement that is used to show detailed information about a company’s assets liabilities and the shareholders’ equity. Another description that can be used is that that the balance sheet is used to show the financial position of a company. The balance sheet is prepared at the end of each financial year. The balance sheet is the most important statement to the creditor. The creditor is interested in analyzing the security and also the ability of the company in meeting its financial obligations. The balance sheet gives figures of the business’s short term and long term obligations. In addition, it provides the creditor with relevant information to calculate the company’s liquidity ratios. A creditor uses the liquidity ratios to determine the ration of a business’s assets that can be converted to cash to cover the business’s debts. The creditor may also be interested in finding out a company’s quick ratio. The quick ratio gives the creditor a satisfaction that in the event the company collapses, the short term assets will be sufficient to cover the debt owed to them (Peterson & Fabozzi, 2012).
Income Statement
The income statement gives information about how much revenue the company has earned in a specific period of time. The income statement gives a report of all the amount of money that was spent in the process of generating revenues. The simple description is that the income statement is used to show if the company is making profit or loses. The balances in the income statements are used to calculate earnings per share. The earnings per share are statements that reflect how much of the profit that was made by the company are paid to the shareholders. The earnings per share also calculate the percentage of the profit that is ploughed back to the company to expand its size. Every well performing business must re-invest some of its profits so that the company can continue to grow and increase it’s capital base as well as its market share (Fridson & Alvarez, 2011). A potential investor will definitely be interested in the income statement so he or she can tell if the company’s financial position offers a good investment opportunity. If the company is making profit, the investor will be assured that t...